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RBI satisfied with pace of monetary transmission

He further said transmission, which was bothering the central bank for a long time, is expected to improve with the introduction of linking loan pricing to external benchmark system, which banks have adopted now.

ET Bureau|
Updated: Dec 06, 2019, 07.16 AM IST
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MUMBAI | KOLKATA: The central bank wants to ensure faster transmission of policy rate cuts for new borrowers seeking funds to buy homes, cars or businesses, nudging high-street lenders to reduce financing costs further instead of continuing its run of driving down benchmark rates.

The Reserve Bank of India (RBI) Thursday justified its decision to pause its policy rate action by maintaining the repo rate at 5.15%. This was not in line with the market consensus, with analysts penciling in a 25 bps reduction.

“Several measures already initiated by the government and the monetary easing initiated by the Reserve Bank since February 2019 are gradually expected to further feed in the real economy,” said RBI governor Shaktikanta Das at a media briefing after the latest policy review. “The impact of external benchmarking by bank will further play out in the coming days and months. The central bank expects that the forthcoming union budget will also provide better insight into further measures to be undertaken by the government and its impact on growth.”

Against this backdrop, the monetary policy committee (MPC) “judged that there is monetary policy space for further action, but it felt appropriate to take a pause at this juncture,” Das said. “The timing is more important than going on mechanically cutting rates on every occasion.”

Analysts said Mint Road was keen to assess the impact of previous reductions on the cost of borrowing in the real economy.

“The RBI wishes to see the lagged impact of its front-loaded 135 basis point cut in the policy rate, besides the slew of fiscal measures taken to drive future growth,” said Abheek Barua, chief economist at HDFC Bank.

Monetary transmission has been full and reasonably swift across various money market segments and the private corporate bond market.

RBI Satisfied with Monetary Transmission Pace
As against the cumulative reduction in policy repo rate by 135 bps during February to October this year, transmission to various money market and corporate debt market segments ranged from 135 bps with respect to overnight call money market to about 218 bps with respect to month CPs of NBFCs, according to RBI.

But the full impact on lending rates is still playing out. Until now, it is 44 bps with regard to new loans.

RBI said the one-year median MCLR has declined by 49 basis points since February while RBI cut the repo rate by 135 basis points cumulative in the same period. The weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 44 basis points, while the WALR on outstanding rupee loans increased by 2 basis points during this period.

“Transmission is set to improve with the introduction of external benchmark system as most banks have linked their lending rates to the repo rate,” Das said.

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